Ita/20/2002 Of Associated Agencies v. Income Tax Officer

Heard learned counsel for the parties. By way of this appeal, the appellant has challenged the order dated 26.07.2002 passed by the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack in I.T.A. No.426/CTK/96 whereby learned Tribunal has allowed the appeal against him. This Court while admitting the matter on 08.01.2004 framed the following substantial questions of law: (1) Whether clause 14 of the deed of partnership of the appellant-firm providing for payment of salary to the Managing partners and Executive Partners satisfies the requirement of Section 40(b) of the Income Tax Act, 1961 and, consequently, whether the salary paid to the working Partners in this case was allowable under the said provision of the I.T. Act, 1961; (2) Whether the Circular No.739 dated 25[th]March, 1996 of the Board of Direct Taxes to the effect that liberal approach may be taken in the initial orders while enforcing the provisions of Section 40(b) of the I.T. Act, 1961 regarding admissibility of Working Partners in the assessment form could be called in aid of the appellant in this case and the salary paid to the Working Partners of the firm could be allowed under Section 40(b) of the I.T. Act, 1961; and (3) Whether the Department could have filed appeal before the Income Tax Tribunal when the disputed demand was less than 1 lakh and there was a Circular that in such cases where demand is less than 1 lakh, the Department should file an appeal? Learned counsel for the appellant contended that he is not pressing Question No.3, mainly on the ground that the issue is now covered by the Circular No.739 dated 25[th] March, 1996 issued by the Department under Annexure-6, Clause-2 of which reads as under: “2.The Board have considered the representations. Since the amended provisions of section 40(b) have been introduced only with effect from the assessment year 1993-94 and these may not have been understood correctly the Board are of the view that liberal approach may be taken for the initial years. It has been decided that for the assessment years 1993-94 to 1996-97 deduction for remuneration to a working partner may be allowed on the basis of the clauses of the type mentioned at (i) above.” Even otherwise the amendment to Section 40(b) of the Income Tax Act, 1961 will have a prospective effect. As such, the deduction for salary of the partner ought to have been allowed by learned Tribunal. In that view of the matter, the question nos.1 and 2 are required to be answered in favour of the assessee and against the Department and we do so. Accordingly, the appeal stands disposed of. Urgent certified copy of this order be granted on proper application. ……..………………… K.S. JHAVERI (CHIEF JUSTICE) ……..…………………… K.R. MOHAPATRA (JUDGE)